THE UNDESIRED CONSEQUENCES FROM FAMILY TRUSTEES

Wealthy families learn from difficult and costly experience the unintentional and adverse consequences of using family members as trustees. Famous family disputes make news and it is easy to be hoodwinked by notoriety into thinking, “This doesn’t happen to people like me.” The reality is the same issues, emotions, and stresses play out in every family; the only thing that differs is “how” it plays out.

In July of 2014, Pat Bowlen, NFL Hall of Famer, stepped down as owner of the Denver Broncos for health reasons. His trust’s Board of Trustees, which included his estate planning attorney and two Bronco executives, were required to select one of his seven children to act as controlling owner of the Broncos. No controlling owner was appointed and, unsurprisingly, disputes over who should control followed, which escalated into a dispute over Pat’s competency to create the trust.

You can view the matter as a dispute over Bowlen’s capacity, nothing more. Or as a manufactured claim by a disappointed child. You can blame Pat for failing to personally select a child before stepping down. Or you can blame the Board of Trustees for not choosing someone sooner. All of these natural reactions, regardless of whether they are right or wrong, miss the true source of conflict, namely, involving family in the management of a large estate.

This source of conflict extends to the entire family, not just the immediate members, and includes management of any source of wealth whether it’s controlled by a trustee or not. In Pat’s case, his trust is managed by a Board of Trustees, none of which are relatives but at least two of which are very close to the family and heavily invested in the primary source of wealth, the Denver Broncos. Furthermore, the trustees’ duty is to select one child to govern that dynasty for all the other siblings, a task which inevitably creates competition, jealousy, and resentment. Often, family members are selected to govern because they are emotionally connected to the beneficiaries and the estate. Unfortunately, the unintended consequence of this is that all decisions, including those based on economic, personal and legal positions, are dictated by emotion.

Sometimes, multiple family members are asked to serve jointly to assuage bias, even-out personality differences, or provide checks and balances on decisions. Unfortunately, forcing individuals to work together when they have diametrically opposing views usually results in that division widening, not closing. The trust and beneficiaries suffer.

For example, Alex and Faye Spanos, owners of the San Diego (now Los Angeles) Chargers both passed away in 2018. Following their deaths, 36% of the team was owned by their trust, held for the benefit of their four children with two of the children, Dea and Dean, serving as co-trustees of the trust. Dea’s and Dean’s opposing views regarding the Chargers came to a head in April of 2021 when Dea sued her brother and other siblings to force a sale for alleged economic reasons. She cited debt in excess of $350,000,000 with projections for large annual shortfalls. Dean and his siblings responded to the suit with a statement expressing that they understand the Chargers are a key family legacy and Dea is motivated by misguided personal agendas.

This example illustrates what happens when you place emotionally invested persons in charge of emotionally charged issues. The point isn’t that Dean should not care about the emotion or that Dea should not care about the economics. Their caring is natural, unavoidable, and should not be ignored, but also shouldn’t be utilized. The use led to more division, which led to a likely expensive and even more polarizing lawsuit. A wiser course for the wealth creator is to place an independent party in charge of the desired family objectives. Then an unbiased party can make unemotional, prudent economic decisions. Otherwise, you have emotions dictating actions, which leads to poor results.

In our experience, a death in the family drastically alters family dynamics and it is impossible to predict how family will react. Events, such as reaching a certain age, large distributions, and deaths in the family, often spurn family members into acting on grudges. Liesel Pritzker sued her father, the trustee of several family trusts (including her own) for $6,000,000,000 She alleged he misappropriated trust funds, arguing, in part, that he was motivated to do so by an eight-year-old family dispute that spurned her parents’ divorce.

Every wealth creator wants the estate plan honored and wants to limit adversity. Unfortunately, no matter how much you plan, you cannot perfectly predict every scenario. A hostile beneficiary will always find something to argue about. If you can keep family out of the governing roles, you can at least eliminate family baggage and reduce damage to relationships.

Choosing family because they are low-cost invokes the old adage that, “You get what you pay for.” An often-overlooked consequence of free labor is that it generates resentment and hostility, especially when the quality or skill of that labor is questioned. Disappointed beneficiaries expect perfect performance regardless of the fee charged or the skill of the fiduciary. The law provides a myriad of claims to raise, including but not limited to, breach of fiduciary duty, duty of loyalty, self-dealing, and failure to behave as a prudent investor. Failure to use a professional often generates disputes, which risks squandering the estate on legal fees, as each of the aforementioned examples illustrate.

Finally, consider the personal liability to which family-member-trustees are subject. Unfortunately, prolonged familial interaction accustoms members to providing a cost-efficient standard of care and communication. Additionally, extensive, intricate knowledge regarding the beneficiaries imbues the trustee with greater ability and, therefore, greater liability. It is quite common for well-meaning family trustees to fall short on technicalities, subjecting them to significant personal liability. For example, little nuances, like failing to include your address on a notice or failing to include a summary of an accounting with the accounting, can cause significant consequences. Historically, family members with foresight resign once they realize the terrible situation created by using family as a trustee. A member of Walt Disney’s family resigned once she learned what decisions the role required. Others did not and several years later a $200,000,000 suit arose.

For the most part, trusts are designed by family to benefit many generations of family, which is a wonderful desire and one worth honoring. However, using family to administer the trust agreement often causes much more harm than good. Rather than family, a reliable, disinterested, and professional corporate trustee should manage the trust estate. Boutique, corporate trust companies provide a tailored solution for families with legacy and complex issues that require high-touch connections, reporting, and responses. Wealthgate Trust Company, the institution behind this article provides services to a limited group of ultra-high net worth families, which allows it to maintain a high level of individualized service, take on unique asset classes or concentrations, and mitigate the risks associated therewith. Using them mitigates the family conflicts and adverse consequences that victimized the Prizkers, Disneys, Bowlens, and Spanos.

ABOUT WEALTHGATE TRUST

Wealthgate Trust is a client-founded, Nevada-based, multi-family boutique trust company. Born from the founder’s own experiences searching for an ideal trustee solution for his family, Wealthgate Trust partners with ultra high net worth families and their advisory team to create, implement, and administer bespoke trust strategies.

Wealthgate Trust is licensed and regulated by the Nevada Financial Insurance Division (NFID), and audited separately by the NFID and two national CPA firms.

ABOUT THE AUTHOR

Aaron is a Wealth Strategist assisting Wealthgate Trust families and their advisors in developing and implementing bespoke estate planning strategies. He’s an attorney licensed to practice in California and Nevada, with over a decade of trust and tax planning experience, and presents on a variety of topics including wealth preservation and private trust companies.

Aaron previously served as the primary tax planning counsel for Lobb & Plewe LLP. He has represented several major trust companies and sits on the board of the Coalition for American Retirement. Aaron earned his JD from the University of Nevada, Las Vegas.